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Balance Of Payments Crises Under Fixed Exchange Rate In Colombia: 1938-1967

Author

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  • Fabio S√°nchez
  • AndrÔøΩs FernÔøΩndez
  • Armando Armenta

Abstract

Between 1938 and 1967, including the Bretton Woods period after 1947, Colombia pegged its currency to the dollar. Although the exchange rate was fixed, the peso was devaluated more than 12% on six occasions. The devaluation episodes were complex, traumatic, highly politicized and had costly macroeconomic effects. The Bretton Woods agreement stated that countries could only devalue their exchange rate in the presence of fundamental imbalances driven, for example, by structural terms of trade deterioration. However, this paper states that in Colombia, the imbalance in the money market was a key factor in explaining the exchange rate crises during the period. The paper is organized as follows: first, a simple theoretical model of a small open economy with imperfect capital mobility is described in order to examine the possible causes of nominal devaluations; second, a narrative approach is used to describe the economic circumstances that surrounded each of the devaluation episodes; finally, a set of econometric tests are used in order to identify the key variables behind the macroeconomic imbalances that preceded each exchange rate crisis. The results show that the external imbalances were mainly associated with the imbalances in the money market. Terms of trade deterioration account for just a small part of current account crises

Suggested Citation

  • Fabio S√°nchez & AndrÔøΩs FernÔøΩndez & Armando Armenta, 2006. "Balance Of Payments Crises Under Fixed Exchange Rate In Colombia: 1938-1967," Documentos CEDE 2041, Universidad de los Andes, Facultad de Economía, CEDE.
  • Handle: RePEc:col:000089:002041
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    File URL: https://repositorio.uniandes.edu.co/bitstream/handle/1992/40996/dcede2006-08.pdf
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    References listed on IDEAS

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    1. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, July.
    2. Fabio S√°nchez & AndrÔøΩs FernÔøΩndez & Armando Armenta, 2005. "Historia Monetaria De Colombia En El Siglo Xx: Grandes Tendencias Y Episodios Relevantes," Documentos CEDE 2792, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Miron, Jeffrey A., 1994. "Empirical methodology in macroeconomics explaining the success of Friedman and Schwartz's 'a monetary history of the United States, 1867-1960'," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 17-25, August.
    4. Martha Misas A. & Hugo Oliveros C. & Jos� Dar�o Uribe E., 1994. "Especificación y estabilidad de la demanda por dinero en Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 13(25), pages 97-120.
    5. Sebastian Edwards & Julio Santaella, 1993. "Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 405-460, National Bureau of Economic Research, Inc.
    6. Martha Misas A. & Hugo Oliveros C. & Jos� Dar�o Uribe, 1994. "Especificaci�N Y Estabilidad De La Demanda Por Dinero En Colombia," Borradores de Economia 2588, Banco de la Republica.
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    JEL classification:

    • N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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